With its diversified, quality portfolio of free cash flow generating assets, Yamana Gold (AUY) boasts one of the best operating models in the sector. The company ranks high among its peers when it comes to production growth profile, low-cost operations, and quality assets. Yamana has a well diversified production profile. None of the company's nine operating assets produces over 500,000 ounces of gold, which limits exposure to any one mine.

From 2007 to 2012, Yamana increased production by a compound annual growth rate of 10%. While there have been some concerns about the company's new mine sequencing at El Penon and Chapada, consistent production at the respective Chilean and Brazilian sites is expected to rebound within the next 12 months.

Development assets
Three new Brazilian mines (Pilar, Ernesto, and C1 Santa Luz) are all expected to start commercial production in 2014 and contribute almost half of the company's Brazilian production. While the company's output is projected to increase significantly as these mines start commercial production, its costs are also expected to decline meaningfully. This should result in strong operating cash flow over the next few years, thus reducing the company's net debt/EBITDA levels and improving Yamana's financial flexibility.

Yamana is undertaking processing improvements at C1 Santa Luz to increase production at the mine. These improvements are expected to significantly enhance recoveries in the second quarter of 2014. Recoveries are currently in the range of 45% and are expected to increase to 78% by the fourth quarter. The company reiterated its C1 Santa Luz commissioning completion timeline for the third quarter.

The company's gold price assumption of $950 per ounce is one of the lowest in the industry, which makes the economics around Yamana's future cash flow significantly more robust than others in the sector. 

Osisko acquisition
Yamana reaffirmed that and together with its partner Agnico Eagle Mines (AEM 0.58%) is moving forward with its acquisition of Osisko Mining (NASDAQOTH: OSKFF) . Yamana will update its financial targets following the close of the transaction, which is anticipated after the plan of arrangement receives approval from Osisko shareholders. Osisko investors are expected to approve the transaction during the company's annual and special shareholders meeting on May 30.

Osisko Mining last month agreed to sell most of its assets to Yamana and Agnico Eagle for $3.6 billion (C$3.9 billion) to prevent a hostile offer from larger rival Goldcorp (GG).

The acquisition will give Yamana and Agnico joint control of Osisko's flagship Quebec asset, the Canadian Malartic gold mine. While Agnico already has large operations in Quebec, the low-cost mine is a key acquisition for Yamana, which is more focused in Latin America. Osisko will be Yamana's first major asset in Canada.

Yamana's acquisition strategy focuses on six main points: maintaining low cost structure, maximizing sustainable cash flow, operating in mining-friendly jurisdictions with proven mining competency, focusing on midsize projects/acquisitions, conventional operations, and the potential to enhance value through exploration. Yamana noted that Osisko meets all of these points. 

Compelling valuation and attractive dividend
Yamana Gold is also trading at a discount relative to its peers. The company has a forward price-to-earnings ratio of 15.1, compared to 20.9 for Goldcorp and 18.2 for Newmont Mining (NEM 1.22%). Similarly Yamana is trading at a price-to-book ratio of 0.8, compared to the industry average of 1.2. Newmont Mining and Goldcorp have respective price-to-book ratios of 1.2 and 1.

Yamana Gold also has an attractive dividend yield of 2%, compared to 0.4% at Newmont and 2.4% at Goldcorp. While the company slashed its dividend by 42% in February, Yamana is expected to continue returning cash to shareholders via stable dividends, given the company's low debt and strong free cash flow generation capacity. 

Bottom line
Yamana Gold offers investors strong production and free cash flow growth. The company's operations are concentrated in some of the less risky regions of Latin America. The Osisko deal is also a long-term strategic positive for Yamana, considering the low cost, long mine life, and minimal political risks of the asset. Finally, the company is also trading at a compelling valuation compared to its peers.